Exporters look for currency opportunities

Cheryl Kalisch Gordon, Rabobank grains and oilseeds senior analyst, says every one cent move in the Australian dollar against the greenback is worth $8 a tonne to Aussie grain growers.

THE AUSTRALIAN dollar has rebounded from last week’s shock slump to decade lows against the US dollar last Thursday, however an economist said the factors that caused the dip remain, leaving the door open to further downside risk.

With a leading economist saying each cent’s movement in the AUD / USD was worth $4 a tonne in terms of wheat swap prices, many farmers are closely monitoring the situation, especially grain producers looking at the 2019-20 season.

It has been trading steadily at levels above US70c from Friday onwards.

Cheryl Kalisch Gordon, Rabobank senior grains and oilseed analyst, said the macro-economic factors that had contributed to the short lived slump had not simply vanished.

“There is pressure on Chinese manufacturing, and Australia is often a virtual proxy to China economically given our close trade ties, so the flow-on effects are felt here.”

“Looking at all the factors, there’s probably more risk to the dollar on the downside than the upside at present, although the foreign exchange market can be very hard to predict.”

Another factor in the Aussie dollar’s drop was strength in the greenback.

International investors, spooked by the poor end to the year on financial markets, have flocked to the safe haven investment of the US dollar, which has soared in the early part of 2019, spurred on by the US Federal Reserve hiking interest rates.

In comparison, the dollar did not fall by as much in comparison to other currencies such as the UK pound or the euro.

However, Dr Kalisch Gordon said the US Federal Reserve was showing signs it may be reconsidering its push to increase interest rates, which will weaken the greenback’s strength.

From an Australian agricultural perspective, she said farmers would look for opportunities to hedge currency.

“Given the poor season and the focus on the domestic market, especially on the east coast, I don’t think the falling dollar will mean too much to current pricing, especially with the domestic basis premium,” she said.

However, she said farmers would look to gain an advantage for the following season.

“Farmers will look at products such as swaps for the upcoming season, with that $8/t difference for every cent’s movement it can be a big deal, if they can lock in currency at 5c lower than it ends up at harvest then that’s $40/t in their favour.”

On the flip side, she said a drop in the dollar could make inputs dearer, which will strain budgets, especially given many will have limited income.

“As we know, all inputs that are imported, such as fuel, fertiliser and chemicals are all exposed to higher prices if the dollar goes down by too much, which will be a strain, but at this stage I don’t think it is going to be a major problem.”

Much of the blame for last week’s drop was apportioned to weaker economic data out of China, where the manufacturing sector contracted for the first time in over a year and a half.

Analysts believe the US / China trade war is starting to impact the Asian giant.